Risks

19 pages, 1025 KiB

Open AccessArticle

COVID-19 Intensity, Resilience, and Expected Returns

by Elham Daadmehr

Risks 2025, 13(3), 60; https://doi.org/10.3390/risks13030060 - 20 Mar 2025

Viewed by 108

This paper provides a model to interpret the relative behavior of expected returns of high- and low-resilience assets from the time of the COVID-19 pandemic, including a novel definition of disaster based on COVID-19 intensity. The setup allows us to disentangle the probability [...] Read more.

This paper provides a model to interpret the relative behavior of expected returns of high- and low-resilience assets from the time of the COVID-19 pandemic, including a novel definition of disaster based on COVID-19 intensity. The setup allows us to disentangle the probability of disaster and investors’ updating probability at each point in time which sheds light on how long-memory investors react to disaster risk and play a role in future prices. The theoretical results show higher revisions in expected return differentials in the case of any perception of a higher possibility of disaster or, equivalently, higher COVID-19 intensity. The intensity of COVID-19 can directly exacerbate the heterogeneity in expected returns for high- and low-resilience assets and their corresponding differentials. More importantly, an increase in COVID-19 intensity increases the expected returns of low-resilience assets more than those of high-resilience ones. Full article

(This article belongs to the Special Issue Risk and Return Analysis in the Stock Market)

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19 pages, 1836 KiB

Open AccessArticle

The Impact of Nature Restoration Law on Equity Behavior: How Biodiversity Risk Affects Market Risk

by Paolo Capelli, Lorenzo Gai, Federica Ielasi and Marco Taddei

Risks 2025, 13(3), 59; https://doi.org/10.3390/risks13030059 - 19 Mar 2025

Viewed by 137

Abstract

This study examines the market reaction to the approval of the Nature Restoration Law, a key component of the EU Biodiversity Strategy, and its implications for biodiversity-related financial risks. Using an event study methodology, we analyze the equity price movements of companies listed [...] Read more.

This study examines the market reaction to the approval of the Nature Restoration Law, a key component of the EU Biodiversity Strategy, and its implications for biodiversity-related financial risks. Using an event study methodology, we analyze the equity price movements of companies listed in the MSCI Europe Index that are equally weighted in relation to the announcement. We select the RepRisk Due Diligence Score, focusing on incidents linked to landscapes, ecosystems, and biodiversity, as a measure of biodiversity risk. At first, it seems that companies with a high RepRisk Due Diligence Score show limited or positive abnormal returns, suggesting that biodiversity risks are already priced for companies that have experienced incidents linked to this issue. Conversely, firms with lower biodiversity risk exposure see null or negative impacts, reflecting heightened investor concerns about new environmental regulations or compliance costs. Although the event does not have a systemic impact on European companies in the index, it seems that some sectors are affected when analyzed using parametric and non-parametric distributions. Full article

(This article belongs to the Special Issue Integrating New Risks into Traditional Risk Management)

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19 pages, 4542 KiB

Open AccessArticle

Forecasting Volatility of the Nordic Electricity Market an Application of the MSGARCH

by Muhammad Naeem, Hothefa Shaker Jassim, Kashif Saleem and Maham Fatima

Risks 2025, 13(3), 58; https://doi.org/10.3390/risks13030058 - 19 Mar 2025

Viewed by 108

Abstract

This paper studies the volatility of electricity spot prices in the Nordic market (Sweden, Finland, Denmark, and Norway) under regime switching. Utilizing Markov-switching GARCH (Generalized Autoregressive Conditional Heteroskedasticity) models, we provide strong evidence of nonlinear regime shifts in the volatility dynamics of these [...] Read more.

This paper studies the volatility of electricity spot prices in the Nordic market (Sweden, Finland, Denmark, and Norway) under regime switching. Utilizing Markov-switching GARCH (Generalized Autoregressive Conditional Heteroskedasticity) models, we provide strong evidence of nonlinear regime shifts in the volatility dynamics of these prices. Using in-sample criteria, we find that regime-switching models have lower AIC (Akaike information criterion) than single-regime GARCH models. In addition, out-of-sample forecasts indicate that regime-switching GARCH models have superior Value-at-Risk (VaR) prediction ability relative to single-regime models, which is directly pertinent to risk management. These findings highlight the importance of incorporating regime shifts into volatility models for accurately assessing and mitigating risks associated with electricity price fluctuations in deregulated markets. Full article

(This article belongs to the Special Issue Modern Statistical and Machine Learning Techniques for Financial Data)

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43 pages, 6594 KiB

Open AccessArticle

Towards Examining the Volatility of Top Market-Cap Cryptocurrencies Throughout the COVID-19 Outbreak and the Russia–Ukraine War: Empirical Evidence from GARCH-Type Models

by Ștefan-Cristian Gherghina and Cristina-Andreea Constantinescu

Risks 2025, 13(3), 57; https://doi.org/10.3390/risks13030057 - 19 Mar 2025

Viewed by 342

Abstract

The cryptocurrency market, known for its inherent volatility, has been significantly influenced by external shocks, particularly during periods of global crises such as the COVID-19 pandemic and the Russia–Ukraine war. This study investigates the volatility of the top seven cryptocurrencies by market capitalization—Bitcoin [...] Read more.

The cryptocurrency market, known for its inherent volatility, has been significantly influenced by external shocks, particularly during periods of global crises such as the COVID-19 pandemic and the Russia–Ukraine war. This study investigates the volatility of the top seven cryptocurrencies by market capitalization—Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Binance Coin (BNB), USD Coin (USDC), XRP, and Cardano (ADA)—from 1 January 2020 to 1 September 2024, employing a range of GARCH models (GARCH, EGARCH, TGARCH, and DCC-GARCH). This research aims to examine the persistence of leverage effects, volatility asymmetry, and the impact of past price fluctuations on future volatility, with a particular focus on how these dynamics were shaped by the pandemic and geopolitical tensions. The findings reveal that past price fluctuations had a limited impact on future volatility for most cryptocurrencies, although leverage effects became evident during market anomalies. Stablecoins (USDC and USDT) showed a distinct volatility pattern, reflecting their peg to the US Dollar, while platform-associated BNB demonstrated unique volatility characteristics. The results underscore the market’s sensitivity to price movements, highlighting the varying reactions of investor profiles across different cryptocurrencies. These insights contribute to understanding volatility transmission within the cryptocurrency market during times of crisis and offer important implications for market participants, particularly in the context of risk management strategies. Full article

(This article belongs to the Special Issue Cryptocurrency Pricing and Trading)

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59 pages, 7152 KiB

Open AccessArticle

Dynamic Shock-Transmission Mechanism Between U.S. Trade Policy Uncertainty and Sharia-Compliant Stock Market Volatility of GCC Economies

by Mosab I. Tabash, Suzan Sameer Issa, Marwan Mansour, Mohammed W. A. Saleh, Maha Rahrouh, Kholoud AlQeisi and Mujeeb Saif Mohsen Al-Absy

Risks 2025, 13(3), 56; https://doi.org/10.3390/risks13030056 - 18 Mar 2025

Viewed by 232

Abstract

This study endeavors to explore the shock-transmission mechanism between Trade Policy Uncertainty (TPU) and the volatility inherent in the Gulf Cooperation Council (GCC) Islamic stock markets by employing the novel Quantile Vector Auto Regression (QVAR) with “Extended Joint” and “Frequency” domain connectedness technique. [...] Read more.

This study endeavors to explore the shock-transmission mechanism between Trade Policy Uncertainty (TPU) and the volatility inherent in the Gulf Cooperation Council (GCC) Islamic stock markets by employing the novel Quantile Vector Auto Regression (QVAR) with “Extended Joint” and “Frequency” domain connectedness technique. Overall findings indicated a U-shaped pattern in the shock-transmission mechanism with the higher TPU shocks transmitted towards Islamic stock market volatility at the extreme quantiles and in the long term. The “Extended Joint” QVAR connectedness approach highlights that, in bearish and moderate-volatility conditions (τ = 0.05, 0.50), diversifying portfolios across less shock-prone equity markets like Qatar and UAE can mitigate risk exposure to TPU shocks. Specific economies receiving higher TPU shocks, like Bahrain, Kuwait, and Saudi Arabia, should implement strategic frameworks, including trade credit insurance and currency hedging, for risk reduction in trade policy shocks during the bearish and moderate-volatility conditions. Conversely, Qatar and Kuwait show the least transmission of error variance from TPU during higher-volatility conditions (τ = 0.95). Moreover, the application of the Frequency-domain QVAR technique underscores the need for short-term speculators to exercise increased vigilance during bearish and bullish volatile periods, as TPU shocks can exert a more substantial influence on the Islamic equity market volatility of Bahrain, Oman, Kuwait, and Saudi Arabia. Long-term investors may need to tailor their asset-allocation strategies by increasing allocations to more stable assets that are less susceptible to TPU shocks, such as Qatar, during bearish (τ = 0.05), moderate (τ = 0.50), and bullish (τ = 0.95) volatility. Full article

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16 pages, 1960 KiB

Open AccessArticle

Political Uncertainty-Managed Portfolios

by Thorsten Lehnert

Risks 2025, 13(3), 55; https://doi.org/10.3390/risks13030055 - 18 Mar 2025

Viewed by 284

Abstract

Forward-looking metrics of uncertainty based on options-implied information should be highly predictive of equity market returns in accordance with asset pricing theory. Empirically, however, the ability of the VIX, for example, to predict returns is statistically weak. In contrast to other studies that [...] Read more.

Forward-looking metrics of uncertainty based on options-implied information should be highly predictive of equity market returns in accordance with asset pricing theory. Empirically, however, the ability of the VIX, for example, to predict returns is statistically weak. In contrast to other studies that typically analyze a short time-series of option prices, I make use of a ‘VIX-type’ but a text-based measure of uncertainty starting in 1890, which is constructed using the titles and abstracts of front-page articles of the Wall Street Journal. I hypothesize that uncertainty timing might increase Sharpe ratios because changes in uncertainty are not necessarily correlated with changes in equity risk and, therefore, not offset by proportional changes in expected returns. Using a major US equity portfolio, I propose a dynamic trading strategy and show that lagged news-based uncertainty explains future excess returns on the market portfolio at the short horizon. While policy- and war-related concerns mainly drive these predictability results, stock market-related news has no predictive power. A managed equity portfolio that takes more risk when news-based uncertainty is high generates an annualized equity risk-adjusted alpha of 5.33% with an appraisal ratio of 0.46. Managing news-based uncertainty contrasts with conventional investment knowledge because the strategy takes relatively less risks in recessions, which rules out typical risk-based explanations. Interestingly, I find that the uncertainty around governmental policy is lower and, by taking less risk, it performs better during periods when the Republicans control the senate. I conclude that my text-based measure is a plausible proxy for investor policy uncertainty and performs better in terms of predictability compared to other options-based measures. Full article

(This article belongs to the Special Issue Portfolio Selection and Asset Pricing)

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15 pages, 1079 KiB

Open AccessArticle

The Impact of Supply Chain Disruptions and Global Uncertainty on Inflation Rate in Saudi Arabia

by Abdulrahman A. Albahouth

Risks 2025, 13(3), 54; https://doi.org/10.3390/risks13030054 - 17 Mar 2025

Viewed by 186

Abstract

Inflation rate is considered undesirable in the modern globalized world due to its adverse and long-lasting impacts. The Kingdom of Saudi Arabia (KSA, hereafter) has also experienced inflationary pressure during the last few years, specifically post-COVID-19. However, the empirical literature on the determinants [...] Read more.

Inflation rate is considered undesirable in the modern globalized world due to its adverse and long-lasting impacts. The Kingdom of Saudi Arabia (KSA, hereafter) has also experienced inflationary pressure during the last few years, specifically post-COVID-19. However, the empirical literature on the determinants of inflation is indeed very scarce in the context of KSA. Amid this backdrop, this research paper aims to figure out the true determinants of inflation by focusing on the role of supply chain disruptions and global uncertainty by focusing on KSA. Quantitative data were collected from credible sources on a monthly basis for the period of 1998M01 to 2024M02 and were analyzed through the “Autoregressive Distributed Lag Model (ARDL)”. Our findings indicate that inflation in KSA is positively impacted by supply chain disruptions, global uncertainty, inflation spillovers from the United States, and money supply in the long run. Similarly, in the short run, only money supply, supply chain disruptions, and global uncertainty are responsible for the prevailing inflation rate in KSA. Moreover, the real effective exchange rate is positively and significantly linked with inflation only in the long run. Furthermore, positive shocks in oil prices cure inflation, while negative shocks in oil prices accelerate inflation in the short run. Our results are expected to shape policy formulation regarding the management of the inflation rate in KSA significantly. Full article

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29 pages, 528 KiB

Open AccessArticle

Modeling Financial Bubbles with Optional Semimartingales in Nonstandard Probability Spaces

by Mohamed Abdelghani and Alexander Melnikov

Risks 2025, 13(3), 53; https://doi.org/10.3390/risks13030053 - 17 Mar 2025

Viewed by 128

Abstract

Deviation of an asset price from its fundamental value, commonly referred to as a price bubble, is a well-known phenomenon in financial markets. Mathematically, a bubble arises when the deflated price process transitions from a martingale to a strict local martingale. This paper [...] Read more.

Deviation of an asset price from its fundamental value, commonly referred to as a price bubble, is a well-known phenomenon in financial markets. Mathematically, a bubble arises when the deflated price process transitions from a martingale to a strict local martingale. This paper explores price bubbles using the framework of optional semimartingale calculus within nonstandard probability spaces, where the underlying filtration is not necessarily right-continuous or complete. We present two formulations for financial markets with bubbles: one in which asset prices are modeled as càdlàg semimartingales and another where they are modeled as làdlàg semimartingales. In both models, we demonstrate that the formation and re-emergence of price bubbles are intrinsically tied to the lack of right continuity in the underlying filtration. These theoretical findings are illustrated with practical examples, offering novel insights into bubble dynamics that hold significance for both academics and practitioners in the field of mathematical finance. Full article

26 pages, 747 KiB

Open AccessArticle

An Integrated Risk Management Methodology for Deposits and Loans

by Gregory R. Hackworth, Weidong Tian and Michael R. Vandenberg

Risks 2025, 13(3), 52; https://doi.org/10.3390/risks13030052 - 13 Mar 2025

Viewed by 143

Abstract

This paper presents an integrated risk management methodology for measuring and managing the economics, risks, and financial resources/constraints related to deposits and loans in a commercial bank. Within a comprehensive and integrated framework, we develop valuation and risk models for all financial products [...] Read more.

This paper presents an integrated risk management methodology for measuring and managing the economics, risks, and financial resources/constraints related to deposits and loans in a commercial bank. Within a comprehensive and integrated framework, we develop valuation and risk models for all financial products on the bank’s balance sheet. Our proposed methodology aligns with regulatory requirements while offering a practical implementation. Unlike traditional industry practices, which often rely on fragmented and siloed risk management solutions, our approach integrates risk modeling across all aspects of the bank’s balance sheet. This new perspective provides a more accurate and consistent assessment of financial risks, improving the bank’s ability to navigate regulatory and economic challenges. Full article

(This article belongs to the Special Issue Valuation Risk and Asset Pricing)

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34 pages, 4565 KiB

Open AccessArticle

The Assessment of Enterprise Risk Management Practices of Ethiopian Commercial Banks

by Tsega Meseret Biresaw and Athenia Bongani Sibindi

Risks 2025, 13(3), 51; https://doi.org/10.3390/risks13030051 - 11 Mar 2025

Viewed by 373

Abstract

The study aims to examine the enterprise risk management (ERM) practices of Ethiopian commercial banks. This approach is undertaken to examine the current approach to enterprise risk management within the Ethiopian banking context. A mixed-methods research design is employed which comprises content analysis [...] Read more.

The study aims to examine the enterprise risk management (ERM) practices of Ethiopian commercial banks. This approach is undertaken to examine the current approach to enterprise risk management within the Ethiopian banking context. A mixed-methods research design is employed which comprises content analysis and a survey study. The study found that the prevailing emphasis of risk management functions in Ethiopian commercial banks revolves on ensuring compliance with regulatory reporting standards. A significant number of the banks have implemented ERM programs primarily to meet regulatory obligations, rather than leveraging ERM to generate firm value. The study identified several gaps in the risk management function of Ethiopian commercial banks, including lack of integration of risk management with the banks’ mission and core values, failure to assess the resources required for effective risk management and to prioritise resource allocation accordingly, inadequate coverage of relevant activities and functional areas by both risk management and internal audit activities, and limitations on the assignment of chief risk officers (CROs) to oversee the risk management function within the banks. Overall, the maturity level of ERM implementation among Ethiopian commercial banks is moderate and requires further enhancement. Full article

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29 pages, 5405 KiB

Open AccessArticle

Relationship Between Japanese Stock Market Behavior and Category-Based News

by Jun Nakayama and Daisuke Yokouchi

Risks 2025, 13(3), 50; https://doi.org/10.3390/risks13030050 - 7 Mar 2025

Viewed by 396

Abstract

This study investigates the relationship between news delivered via the QUICK terminal and stock market behavior. Specifically, through an evaluation of the performance of investment strategies that utilize news index created based on its scores indicating positive or negative sentiment, we examine whether [...] Read more.

This study investigates the relationship between news delivered via the QUICK terminal and stock market behavior. Specifically, through an evaluation of the performance of investment strategies that utilize news index created based on its scores indicating positive or negative sentiment, we examine whether index construction that takes into account the content of individual news items contributes to improved predictive power with regard to stock prices. We verify the performance of this investment strategy based on signal indicators derived from news indices focusing on short-term trends using time-series decomposition. After refining the news indicators based on news categories, we observe an improvement in the strategy’s performance, demonstrating that the value of news varies across different categories and the importance of considering the content and meaning of text news. Full article

(This article belongs to the Special Issue Critical Issues in Financial Markets: Risk-Return Tradeoff and Investment Strategies)

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20 pages, 5280 KiB

Open AccessArticle

Commodity Risk and Forecastability of International Stock Returns: The Role of Oil Returns Skewness

by Afees A. Salisu and Rangan Gupta

Risks 2025, 13(3), 49; https://doi.org/10.3390/risks13030049 - 6 Mar 2025

Viewed by 233

Abstract

This study examines the out-of-sample predictability of expected skewness of oil price returns, which serves as a metric for global future risks, as we show statistically through the association with crises of different nature, for stock returns of 10 (8 advanced plus two [...] Read more.

This study examines the out-of-sample predictability of expected skewness of oil price returns, which serves as a metric for global future risks, as we show statistically through the association with crises of different nature, for stock returns of 10 (8 advanced plus two emerging) countries using long-range monthly data of over a century for each country. Using a distributed lag predictive econometric model, which controls for endogeneity, persistence, and conditional heteroscedasticity, we provide evidence of the strong statistical significance of the predictive impact of the third moment of oil price returns for equity returns for all the countries across various forecast horizons and the length of out-of-sample periods. These findings also hold for the shorter sample periods of 3 other emerging markets: Brazil, China, and Russia. Our findings have important implications for academics, investors, and policymakers. Full article

(This article belongs to the Special Issue Traditional and Emerging Risks in the World and Financial Markets)

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29 pages, 491 KiB

Open AccessFeature PaperArticle

Enterprise Risk Management, Financial Reporting and Firm Operations

by Siwei Gao, Hsiao-Tang Hsu and Fang-Chun Liu

Risks 2025, 13(3), 48; https://doi.org/10.3390/risks13030048 - 3 Mar 2025

Viewed by 280

Abstract

We examine financial reporting and firm operations, focusing specifically on the roles of ‘enterprise risk management’ (ERM), within which a holistic approach is taken to the conceptualization and management of all types of risk. We measure ERM implementation based on information obtained from [...] Read more.

We examine financial reporting and firm operations, focusing specifically on the roles of ‘enterprise risk management’ (ERM), within which a holistic approach is taken to the conceptualization and management of all types of risk. We measure ERM implementation based on information obtained from 2004–2014 financial reports on 648 firms. We find that ERM implementation is associated with higher reporting quality and reduced volatility in future firm performance in terms of both operating cash flows and stock returns. Our difference-in-differences analyses indicate that these associations were strengthened by the introduction of the Securities and Exchange Commission (SEC) final rule in 2010, requiring increased and improved disclosure related to risk oversight. Our findings, which we attribute to the incremental effects of ERM and enhanced risk disclosure over time, point to the substantial advantages of ERM and the importance of related disclosure, which should prove to be of interest to firms as well as policymakers. Full article

26 pages, 2784 KiB

Open AccessArticle

Financial Risk Management of 50 Global Companies Using SEM: Insights from Sustainable Development and the Recycling Economy

by Lazar A. Badalov, Daria V. Lebedeva, Natalia V. Bondarchuk and Daria A. Dinets

Risks 2025, 13(3), 47; https://doi.org/10.3390/risks13030047 - 1 Mar 2025

Viewed by 305

Abstract

This article examines the relationship between implementing sustainable development measures and financial risk in the context of global companies and the recycling economy. This study uses statistics from Forbes, TIME, and Statista on 50 global companies that actively embrace sustainable development and recycling-economy [...] Read more.

This article examines the relationship between implementing sustainable development measures and financial risk in the context of global companies and the recycling economy. This study uses statistics from Forbes, TIME, and Statista on 50 global companies that actively embrace sustainable development and recycling-economy practices across various industries. As a result, we have compiled a Structural Equation Model (SEM), with the help of which we established that growth in the activity of their implementing the measures of sustainable development and the recycling economy by each 1 point leads to a reduction in the risk of a shortfall in global companies’ profit by USD 0.0741 billion and the risk of ousting global companies from the market by USD 1.8374 billion. It has also been revealed that a reduction in the risk of the shortfall in profit by each USD 1 billion is accompanied by an increase in the activity of global companies’ implementing the measures of sustainable development and the recycling economy by 0.3433 points, and a reduction in the risk of market displacement by each USD 1 billion is accompanied by a growth in this activity by 0.0073 points. The theoretical novelty of the research consists of substantiating the differences in the consequences of the development of the recycling economy for financial risks of companies from different sectors. Practical implications of the proposed recommendations for companies in different industries are that the authors’ recommendations for the development of the recycling economy will allow for systemic reduction in financial risks in the sectors “Automotive Industry & Suppliers”, “Banking, Insurance & Financial Services”, “Chemicals, Drugs & Biotechnology”, and “Retail, Wholesale & Consumer Goods”. We have also revealed the threat of growth of all financial risks in the course of the development of the recycling economy in the sphere “Transportation, Logistics & Aviation”. In “Electronics, Hardware & Equipment” and “Manufacturing & Industrial Production”, the implications are differentiated among financial risks, which require flexibility and care during the development of the recycling economy. We find that global companies’ implementation of sustainable development measures, recycling economy practices, and financial risks are mutually dependent organizational phenomena. Moreover, the risk to profits and market displacement manifest differently among global industries. Our conclusions support expediency in implementing sustainable development and recycling-economy measures to reduce the financial risks to global companies. Further, we propose practical recommendations for companies from different sectors of the world economy. Full article

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27 pages, 10976 KiB

Open AccessArticle

Cyber, Geopolitical, and Financial Risks in Rare Earth Markets: Drivers of Market Volatility

by Emilia Calefariu Giol, Oana Panazan and Catalin Gheorghe

Risks 2025, 13(3), 46; https://doi.org/10.3390/risks13030046 - 28 Feb 2025

Viewed by 442

Abstract

This study examines the integrated impacts of cyberattacks, geopolitical, and financial market volatility on rare earth markets during the 2014–2024 period, using Time-Varying Parameter Vector Autoregression and wavelet analysis. By bridging critical gaps in the literature, this research provides a comprehensive framework for [...] Read more.

This study examines the integrated impacts of cyberattacks, geopolitical, and financial market volatility on rare earth markets during the 2014–2024 period, using Time-Varying Parameter Vector Autoregression and wavelet analysis. By bridging critical gaps in the literature, this research provides a comprehensive framework for understanding the compounded effects of emerging risks on market dynamics. The analysis includes key market indices (SOLLIT, PICK, SPGSIN, GSPTXGM, MVREMXTR, and XME), alongside green energy prices, to capture cross-market dependencies. The findings reveal that financial volatility exerts the most persistent long-term influence, while geopolitical events, such as the US-China trade tensions and the Ukraine conflict, trigger significant market disruptions. Cyberattacks, although episodic, exacerbate short-term volatility, especially during global crises. Rising green energy prices further amplify vulnerabilities in supply chains, underscoring the interconnectedness of rare earth markets and the sustainable energy transition. This research provides actionable insights for integrated risk management strategies, emphasizing supply chain diversification, enhanced cybersecurity, and international cooperation to ensure market stability and resilience in the energy transition. Full article

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24 pages, 612 KiB

Open AccessArticle

Board Gender Diversity, Information Asymmetry, and Investment Efficiency: Do Female Voices Make a Difference?

by Ngeyan N. Almutairi, Maged M. Albaz and Tarek M. Hashad

Risks 2025, 13(3), 45; https://doi.org/10.3390/risks13030045 - 27 Feb 2025

Viewed by 320

Abstract

This paper investigates how board gender diversity (BGD) impacts information asymmetry (IA) and investment efficiency (IE), in addition to the moderating role of board gender diversity on the nexus between information asymmetry and investment efficiency in Egypt, motivated by the unclear lens and [...] Read more.

This paper investigates how board gender diversity (BGD) impacts information asymmetry (IA) and investment efficiency (IE), in addition to the moderating role of board gender diversity on the nexus between information asymmetry and investment efficiency in Egypt, motivated by the unclear lens and mixed evidence in the previous literature within this area, especially in developing countries. Thus, the paper followed a deductive research approach for 84 listed firms on the Egyptian Exchange from 2014 to 2023. The findings present new evidence that differs from the common findings in the literature, such as a U-shaped non-linear impact that was found regarding the impact of BGD on both IA (20.71% turning point) and IE (20.38% turning point). However, the IA shows a U-shaped non-linear effect on IE, and the incorporation of BGD as a moderator cause shifting from a (U) shape curve to an inverted (U) shape curve. Our findings from Egypt can motivate future academic research to re-examine the role of BGD from other perspectives in other countries and circumstances. In addition, this paper gives professional authorities and regulators insights into the optimal level of BGD and its critical role in corporate governance and performance, not just the benefits of increasing the diversity ratio, and can also help promote gender equality in corporate management, which can have social and economic benefits. Full article

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23 pages, 515 KiB

Open AccessArticle

Copula-Based Risk Aggregation and the Significance of Reinsurance

by Alexandra Dias, Isaudin Ismail and Aihua Zhang

Risks 2025, 13(3), 44; https://doi.org/10.3390/risks13030044 - 26 Feb 2025

Viewed by 270

Abstract

Insurance companies need to calculate solvency capital requirements in order to ensure that they can meet their future obligations to policyholders and beneficiaries. The solvency capital requirement is a risk management tool essential for addressing extreme catastrophic events that result in a high [...] Read more.

Insurance companies need to calculate solvency capital requirements in order to ensure that they can meet their future obligations to policyholders and beneficiaries. The solvency capital requirement is a risk management tool essential for addressing extreme catastrophic events that result in a high number of possibly interdependent claims. This paper studies the problem of aggregating the risks coming from several insurance business lines and analyses the effect of reinsurance on the level of risk. Our starting point is to use a hierarchical risk aggregation method which was initially based on two-dimensional elliptical copulas. We then propose the use of copulas from the Archimedean family and a mixture of different copulas. Our results show that a mixture of copulas can provide a better fit to the data than an individual copula and consequently avoid over- or underestimation of the capital requirement of an insurance company. We also investigate the significance of reinsurance in reducing the insurance company’s business risk and its effect on diversification. The results show that reinsurance does not always reduce the level of risk, but can also reduce the effect of diversification for insurance companies with multiple business lines. Full article

(This article belongs to the Special Issue Risk Analysis in Insurance and Pensions)

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4 pages, 271 KiB

Open AccessEditorial

Special Issue “Financial Analysis, Corporate Finance and Risk Management”

by Eulália Santos and Margarida Freitas Oliveira

Risks 2025, 13(3), 43; https://doi.org/10.3390/risks13030043 - 26 Feb 2025

Viewed by 284

Abstract

In an era of rapid economic transformation, evolving regulatory landscapes, and technological advancements, the need for robust financial analytics, effective corporate financial strategies, and risk management frameworks has never been more critical [...] Full article

(This article belongs to the Special Issue Financial Analysis, Corporate Finance and Risk Management)

21 pages, 454 KiB

Open AccessArticle

Managerial Incentives and Firm Risk Taking: The Mediating Role of Corporate Social Responsibility

by Desheng Yin, Michael Wang, Yufan Sun, Haizhi Wang and Xinting Zhen

Risks 2025, 13(3), 42; https://doi.org/10.3390/risks13030042 - 25 Feb 2025

Viewed by 264

Abstract

In this study, we focus on managerial incentives provided by debt-like compensation and further investigate whether and to what extent such managerial incentives may affect CEOs’ decisions on risk management. Building on cumulative prospect theory and instrumental stakeholder theory, we propose that CEOs [...] Read more.

In this study, we focus on managerial incentives provided by debt-like compensation and further investigate whether and to what extent such managerial incentives may affect CEOs’ decisions on risk management. Building on cumulative prospect theory and instrumental stakeholder theory, we propose that CEOs tend to have risk-reduction incentives if they are paid with debt in their own firms, and that firm engagement in corporate social responsibility (CSR) activities can mediate the relationship between debt-like compensation and firm risk taking. In addition, we posit that the mediated relationship between CEO debt-like compensation and firm risk taking is contingent, and we propose environmental dynamism and munificence as two such contingencies that moderate the mediated process. Using a large longitudinal dataset of nonfinancial U.S. firms, we document strong supportive evidence for these hypotheses. Full article

19 pages, 941 KiB

Open AccessArticle

ESG and Financial Distress: The Role of Bribery, Corruption, and Fraud in FTSE All-Share Companies

by Probowo Erawan Sastroredjo and Tarsisius Renald Suganda

Risks 2025, 13(3), 41; https://doi.org/10.3390/risks13030041 - 24 Feb 2025

Viewed by 409

Abstract

Our investigation examined the impact of ESG (Environmental, Social, and Governance) activities on corporate financial distress. This research utilised data from companies listed in the FTSE All-Share index from 2014 to 2022 from the Refinitiv EIKON database. We incorporated year- and industry-fixed effects [...] Read more.

Our investigation examined the impact of ESG (Environmental, Social, and Governance) activities on corporate financial distress. This research utilised data from companies listed in the FTSE All-Share index from 2014 to 2022 from the Refinitiv EIKON database. We incorporated year- and industry-fixed effects into our analysis to address changing economic conditions and industry-specific effects. ESG scores were used as a proxy for ESG activities, while Z-scores were utilised to gauge financial distress. The results unveiled a compelling trend: ESG activities showcased a negative correlation with financial distress, implying that companies actively involved in ESG actions are less likely to face default, even after incorporating several robustness and endogeneity tests. Moreover, when examining the role of bribery, corruption, and fraud issues (negative issues) as a moderating factor, our findings revealed that lower negative issues strengthen the negative relationship between ESG (governance pillar) and financial distress. This suggests that governance mechanisms effectively reduce financial distress in less corrupt environments, where institutional quality supports properly implementing governance practices. These findings offer valuable insights for companies seeking to mitigate financial distress by adopting ESG strategies. Full article

(This article belongs to the Special Issue Integrating New Risks into Traditional Risk Management)

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27 pages, 953 KiB

Open AccessFeature PaperArticle

Deep Reinforcement Learning in Non-Markov Market-Making

by Luca Lalor and Anatoliy Swishchuk

Risks 2025, 13(3), 40; https://doi.org/10.3390/risks13030040 - 24 Feb 2025

Viewed by 351

Abstract

We develop a deep reinforcement learning (RL) framework for an optimal market-making (MM) trading problem, specifically focusing on price processes with semi-Markov and Hawkes Jump-Diffusion dynamics. We begin by discussing the basics of RL and the deep RL framework used; we deployed the [...] Read more.

We develop a deep reinforcement learning (RL) framework for an optimal market-making (MM) trading problem, specifically focusing on price processes with semi-Markov and Hawkes Jump-Diffusion dynamics. We begin by discussing the basics of RL and the deep RL framework used; we deployed the state-of-the-art Soft Actor–Critic (SAC) algorithm for the deep learning part. The SAC algorithm is an off-policy entropy maximization algorithm more suitable for tackling complex, high-dimensional problems with continuous state and action spaces, like those in optimal market-making (MM). We introduce the optimal MM problem considered, where we detail all the deterministic and stochastic processes that go into setting up an environment to simulate this strategy. Here, we also provide an in-depth overview of the jump-diffusion pricing dynamics used and our method for dealing with adverse selection within the limit order book, and we highlight the working parts of our optimization problem. Next, we discuss the training and testing results, where we provide visuals of how important deterministic and stochastic processes such as the bid/ask prices, trade executions, inventory, and the reward function evolved. Our study includes an analysis of simulated and real data. We include a discussion on the limitations of these results, which are important points for most diffusion style models in this setting. Full article

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26 pages, 3246 KiB

Open AccessArticle

An Interplay Between Digital Banking Services, Perceived Risks, Customers’ Expectations, and Customers’ Satisfaction

by Sladjana Barjaktarovic Rakocevic, Nela Rakic and Rade Rakocevic

Risks 2025, 13(3), 39; https://doi.org/10.3390/risks13030039 - 24 Feb 2025

Viewed by 742

Abstract

Advancements in technology and emerging digital trends are driving the expectations of bank clients. With the development of new, innovative technologies, the banking sector has started creating new products and services and looking for new channels through which to offer those services in [...] Read more.

Advancements in technology and emerging digital trends are driving the expectations of bank clients. With the development of new, innovative technologies, the banking sector has started creating new products and services and looking for new channels through which to offer those services in a way that meets customers’ uplifted expectations. The aim of this paper is to explore several aspects of digital banking services, analyze user expectations, evaluate risks, and gauge how customers’ expectations and perceived risks affect their satisfaction with these services. For that purpose, an empirical survey was conducted using an online questionnaire, obtaining 535 valid responses. This research showed that bank clients identified digital banking services as the most important factor when choosing a bank. Furthermore, the results of the study revealed which perceived characteristics and expectations of digital banking services create the highest levels of customer satisfaction in using digital banking services, and what types of perceived risks of using digital banking services should be mitigated. Full article

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Risks, Volume 13, Issue 3 (March 2025) – 22 articles

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